Ben Inker: This Is The “Shocking Hole” That Will Be Blown In Equities If Rates Spike By 1.5%

Jon Alternative Media, Banking, Blogosphere, Economy

In early June, we presented a Goldman analysis which calculated what the market impact on fixed income securities would be as a result of even a modest 1% move higher in interest rates. The conclusion: a rather staggering $2.4 trillion in MTM losses for just US securities.
As Goldman explained at the time, “the aggregate interest rate duration across the bond market has also increased over the past several years, up over 20% vs. the 1995-2005 average level. Longer durations are largely driven by lengthening maturities on the bonds outstanding, as issuers have elected to term out their debt structures. Exhibit 4 shows that the average maturity of corporate bonds issued in 2015 and 2016 is over 16 years, vs. an average of 8.6 years during 1995-2005. The US Treasury has also chosen to lengthen its debt maturity structure, with more use of long duration bonds…. In 1994, the average yield on the bond index was 5.6%, vs. 2.2% currently. Lower bond coupons means that proportionately more of the bond cashflows now comes from principal, which tends to be distributed towards the end of the bond lifetime.”

This post was published at Zero Hedge on Aug 1, 2016.